Many of us engage in activities for recreation, but not all of us can earn from it. If you’ve recently started to make money from a hobby, it may be time to register your activities as a business officially. You may be hesitating because you either don’t believe you earn enough from the activity to call it a business or feel it’s simply a hobby that makes money on the side. However, at some point, you may have to determine whether your hobby classifies as a business – both for tax and business reasons.
Determining how the IRS distinguishes between a business and a hobby is important for various reasons. But most importantly, if you have a hobby that helps you earn money on the side, the IRS may consider it a business if it meets certain criteria. And if it does, it means you may owe the government taxes.
Start by asking yourself if your hobby intends to earn a profit. If it does, your activity is already considered a business – mainly if your hobby has already successfully yielded earnings in the past. If you answer ‘yes’ to the following questions, the IRS considers your hobby a business.
For whatever reason, you may be avoiding registering your activities as a business. However, you would be missing out on valuable tax benefits that business owners enjoy, particularly deductions. The top tax deductions for small businesses include auto expenses, business expenses, insurance, travel expenses, interest, promotional costs, and equipment. Certain taxes like sales tax on operations-related items you’ve purchased and fuel taxes are also generally deductible.
Hiding that your hobby should be classified as a business can also trigger an IRS audit. If you’ve been generating significant profits from your hobby, the IRS will want to take a closer look at your activities to determine if you owe the government taxes.
It’s also important to mention that the IRS has put rules in place to prevent people from claiming tax deductions excessively on activities that should be classified as a hobby. You can reduce your business’s chances of being ruled as a hobby by maintaining detailed records supporting any deductions you claim.
Are you worried that your business may be classified as a hobby? Or do you have a high-earning hobby and wonder if the IRS will be after you soon?
Contact us at 206-970-4477. Talk with a Tax Resolution Expert today. We’re here to help Seattle business owners with their tax concerns and troubles.